1. Field of the Invention
The present invention relates in general to the field of business analysis and planning and, more specifically, to activity based cost management.
2. Description of Related Art
Activity Based Cost (ABC) Modeling is a useful financial tool for managers to make strategic and operational decisions. Business organizations manage detailed information about their sales structure and their cost structure. Sales information is collected by individual transactions that can be directly classified by facets such as date, store, stocking keeping units (SKUs), quantity, price, customer and payment method. General ledger and payroll costs are collected by functional information such as account and department codes. ABC modeling is used to allocate general ledger and payroll costs to cost objects that are organized by facets of the revenue classification system. By matching costs with associated revenue in each revenue classification, profitability analysis by revenue classifications can be performed.
ABC systems reorganize costs by allocating costs to activities and activities to cost objects. Traditional ABC systems are configured using formulas to specify relationships between activity costs and cost drivers. These ABC systems employ user-interfaces for entering formulas and use interpreters to solve these formulas. Establishing a set of formulas for each activity-to-cost-driver relationship is a time consuming process and is difficult for some users to manage conceptually.
Traditional ABC systems use data structures that are coded into the ABC program such that the classification system for cost objects is fixed in the code. Since ABC analysis is often an iterative process in which classification systems and allocation formulas are frequently changed. Changing the classification system often requires revising the ABC program and recompiling it. Furthermore, changing the classification of cost objects changes the organization of the cost driver information, often requiring that the formulas be modified. Management decision making based on ABC analysis would benefit by a flexible system in which classifications and allocation schemes can be easily set, modified, and updated.
Traditional ABC systems generate management reports that present cost objects in classifications that do not distinguish between specific cost elements in the general ledger. It would be useful to be able to trace costs back to the general ledger, so that each cost object could be broken down by the cost elements of the general ledger. An analysis of cost objects by general ledger classifications can provide useful information for strategic and operational decision-making. Additionally, the absence of the ability to reconcile to the general ledger, reduces the credibility of the results of the traditional ABC system.